January 29, 2016

Volume XLII, Issue I

Colfax Corporation
NYSE: CFX
Dow Jones Indus: 16,466.30
S&P 500:
1,940.24
Russell 2000:
1,035.38
Index Component: Russell 2000

Trigger: No
Type of Situation: Business Value

Price:
Shares Outstanding (MM):
Fully Diluted (MM) (% Increase):
Average Daily Volume (MM):

Market Cap (MM):

Enterprise Value (MM):
Percentage Closely Held:

$ 2,750
$ 4,078
Insiders~20%

52-Week High/Low:
5-Year High/Low:

$ 53.59/18.22
$ 74.82/18.22

Trailing Twelve Months

Price/Earnings:
Price/Stated Book Value:
Net Debt (MM):
Upside to Estimate of
Intrinsic Value:

22.14
124.4
125.0 (1%)
1.6

13.6x
0.9x
$ 1,328
61%

Dividend:
Yield:

NA
NA

Net Revenue Per Share:

2014:
2013:
2012:
2011:

$
$
$
$

Earnings Per Share:

2014:
2013:
2012:
2011:

$ 3.02
$ 1.56
$ (0.92)
$ 0.10

Fiscal Year Ends:

Company Address:

Telephone:
CEO:

Overview
Colfax Corporation (CFX or the Company) is
an industrial conglomerate with a truly global presence.
The Company generates over $4 billion in annual sales,
with roughly even contributions derived from its two
segments: Gas and Fluid Handling and Fabrication
Technology. Its portfolio of brands includes Howden,
Colfax Fluid Handling, and ESAB. As of the most recent
fiscal year 78% of total sales were derived from markets
outside of the United States, and nearly half of total
Company sales were derived from emerging markets.
Key end markets include Power Generation, Oil & Gas,
and General Industrial.

37.69
41.90
43.01
15.64

Colfax was founded by Steven and Mitchell

Rales in 1997. Prior to starting Colfax, the Rales
brothers were well known for founding Danaher
Corporation (ticker: DHR) during the 1980s, one of the
best performing companies during its history as a public
firm as measured by stock appreciation. In part, the
founding of Colfax represented an attempt by the Rales
brothers to replicate the success of Danaher through a
new venture. The Rales brothers continue to hold a
19% stake in CFX. Not surprisingly, the strategic
approach at Colfax incorporates much of the same
principles used at Danaher, embodied within the Colfax
Business System (also known as CBS). Additionally,
Colfax has been assembled in a similar fashion, aided
by significant M&A activity.

December 31
420 National Business
th
Parkway, 5 Floor
Annapolis Junction, MD 20701
301-323-9090
Matthew Trerotola

Clients of Boyar Asset Management, Inc. do not own shares of Colfax

Corporation common stock.
Analysts employed by Boyars Intrinsic Value Research LLC do not
own shares of Colfax Corporation common stock.

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Colfax Corporation
Given the profile and sales mix at Colfax, it should come as no surprise that recent financial results have
been under pressure. The firm has been facing multiple market-related headwinds, reflecting the cyclicality and
economic sensitivity of its businesses and end markets. To make matter worse, CFXs significant exposure to
overseas markets have caused an additional drag on results via negative currency translation. Through the first
9 months of 2015, CFXs sales and operating profit have declined 15% and 27% respectively.
As suggested by the firms recent results and guidance, near-term growth comparisons (2016) for CFX
are likely to remain relatively weak. This outlook reflects the challenging conditions within several of CFXs end
markets. However, we concur with managements view that the current downturn is cyclical in nature, and does
not represent a permanent impairment in the firms growth or profitability. Looking at CFX from a 2-3 year
perspective (roughly 2018), we believe sales and EBITDA of $4.5 billion and $600 million could be attainable.
This assumes some recovery in end market fundamentals, and incorporates the benefits of the firms ongoing
efficiency and cost reduction initiatives. Earnings power beyond 2018 could be significantly higher in our view,
and this is likely being overlooked by investors in this environment.
CFX shares have clearly been out of favor with investors over the past 1-2 years. The stock has
declined by more than 50% over the past year, and shares have declined by roughly 70% from 2014 highs. Our
estimate of intrinsic value for CFX of $36 per share is based on a 2-3 year time frame, and assumes only a
partial recovery in its end markets (and utilizes an operating margin of 10%, still below the mid-teens objective
and below levels achieved in recent years). This estimate implies an EV/EBITDA multiple of 10.0x, and potential
upside of more than 60% over the next 2-3 years. Looking beyond 2018, intrinsic value could reach $45 per
share (over 100% upside) if CFX can approach its more normalized level of growth and profits.
History & Business Overview
Colfax was founded by Steven and Mitchell Rales in 1997. Their goal upon founding the Company was
described as: building a world-class global industrial enterprise focused on delighting its customers and
dedicated to continuous improvement. Prior to starting Colfax, the Rales brothers were well known for founding
Danaher Corporation (ticker: DHR) during the 1980s, one of the best performing companies in recent history as
measured by stock performance. Over the course of 35 years, Danaher shares achieved an estimated 35%
CAGR in share price. Danahers market capitalization is now approaching $60 billion, and annual revenue now
exceeds $20 billion (both Rales brothers remain on DHRs board of directors). The strategy and values of Colfax
are designed to reflect the same founding principles of Danaher. Danaher was built over the decades into a top
performing conglomerate via a series of acquisitions across multiple industries. Danaher eventually evolved
from a portfolio of fragmented businesses into a structure of business platforms focused on building strong
competitive positions within multi-billion dollar global markets. A key driver of Danahers successful track record
relates to its implementation of kaizen, a Japanese business concept that stresses continuous company
improvement. Danahers adoption of kaizen was embodied in its creation of the Danaher Business System (or
DBS) during the mid 1980s. DBS is a business approach founded on lean manufacturing concepts that is a
central aspect of the companys strategy and culture. The Danaher Business Systems areas of focus include
growth, leadership, and efficiency. DBS is designed to produce a culture that Danaher describes as valuesbased, customer-centric, process-oriented, and results-driven. Ultimately, DBS seeks to create shareholder
value via a combination of growth and margin expansion over the long term. Given the stellar track record of
Danaher, it is safe to conclude that DBS has been a key differentiator and driver of success.
In part, the founding of Colfax represented an attempt by the Rales brothers to replicate the success of
Danaher through a new venture. Not surprisingly, the strategic approach at Colfax incorporates much of the
same principles used at Danaher, embodied within the Colfax Business System (also known as CBS). Colfax
has been assembled in a similar fashion as well, aided by significant M&A activity. Although Colfax is less than
20 years old, it warrants mention that several of its businesses have histories that span over a century. Initial
acquisitions focused on businesses such as fluid handling and power transmission. CFXs most significant
acquisition to date has been its 2012 acquisition of Charter International PLC (deal valued at over $2 billion in
cash and stock). Charter was a U.K. based industrial firm with a specialization in welding and cutting systems as
well as industrial gases. In order to facilitate the transaction, CFX raised new capital via debt and equity,
including preferred stock. The preferred shares were issued to BDT Capital Partners, a Chicago-based
merchant banking firm founded by Byron Trott. Prior to founding BDT, Trott was vice chairman at Goldman
Sachs investment banking division and had been a long time advisor to Warren Buffett (Trott is often described
as Buffetts Banker). BDT has since converted its shares into common stock, and is CFXs largest outside
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Colfax Corporation
shareholder (9% stake). In many ways, Charter was a transformative deal for CFX which significantly expanded
the size of the Company. At the time of the deal, Charters annual revenue ($2.7 billion) was more than five
times the revenue base of CFX. The transaction was viewed as complementary by CFX management,
expanding its presence outside of pumps and valves and creating a more diversified engineering services
concern with greater exposure to emerging markets.
Today, CFX is a well established, global player in several industrial and engineering businesses. The
Company generates over $4 billion in annual sales, with roughly even contributions derived from its 2 segments:
Gas and Fluid Handling and Fabrication Technology. Its portfolio of brands includes Howden, Colfax Fluid
Handling, and ESAB. Product distribution is via both direct sales and third party channels. As the following
graphs illustrate, the firm has a relatively diversified sales mix in terms of end markets, and in terms of
foremarket compared to aftermarket purchases. From a margin perspective, CFX typically earns higher margins
on aftermarket purchases. CFXs sales mix is also international by nature. As of the most recent fiscal year 78%
of total sales were derived from markets outside of the United States, and nearly half of total Company sales
were derived from emerging markets. CFXs manufacturing facilities possess a similarly global profile with 75%
of property, plant, and equipment located outside of the United States. Additionally, the majority of CFXs
domestic and foreign manufacturing facilities are owned. Given the firms global profile, CFXs overall financial
results can be highly sensitive to foreign currency translation. Colfaxs businesses also have some seasonality,
reflecting heightened demand in the fourth quarter as client capital spending tends to ramp up at year-end.
Colfax employs approximately 15,000 employees around the world, and 19% of CFX employees are
represented by a union or work council.

Marine
11%

Sales by End Market

Foremarket vs. Aftermarket

(first 9 months 2015)

(first 9 months 2015)

Mining
5%
Power
Generation
35%

Aftermarket
35%

General
Industrial &
Other
28%

Foremarket
65%

Oil, Gas &

Chemical
21%

Fabrication Technology (52% of sales): Colfaxs Fabrication Technology division is a provider of

products and equipment used in the cutting and joining of steel, aluminum, and other metals (welding
and related activities). The Company utilizes several well known brands within the welding industry
including ESAB and Victor. The acquisition of Victor was completed in 2014 for $949 million (CFXs
largest deal since Charter). A significant portion (35%) of Fabrication Technology sales is derived from
consumable products for welding (electrodes, wire, fluxes, etc.). Equipment provided to clients includes
everything from portable welding machines to large welding systems. Products from the Fabrication
Technology segment serve end markets such as oil and gas production, power generation, shipbuilding,
pipelines and mining. The global market for Fabrication and Technology is approximately $22 billion and
has a long-term growth rate of approximately 3%-4%. The industry landscape is relatively fragmented
with a majority of market share held by smaller players who possess modest scale. Importantly, Colfaxs
ESAB brand is a leader in industry market share (#1 in Europe, #1 in South America, #1 in India, #3 in
North America), and its largest scale competitors include Lincoln Electric and Illinois Tool Works. Close
to half of this segments revenue is derived from emerging markets.
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Colfax Corporation
Gas and Fluid Handling (48% of sales): The Companys Gas and Fluid Handling segment supplies a
wide range of products on a global basis. Its product line includes industrial fans, compressors, rotary
heat exchangers, and various types of pumps and valves (and related services). Products on the gas
handling side are typically marketed under the Howden brand, while fluid handling is primarily marketed
under the Colfax Fluid Handling brand. Large scale competitors for the Gas and Fluid Handling segment
include Siemens, GE, and Netzsch (a German firm). The size of the global gas handling market is
approximately $12 billion and the overall fluids handling industry is approximately $5 billion in size. The
long-term growth rate of the gas and fluid handling industry is roughly 3%-5%. Similar to its position in
the Fabrication Technology business, CFX brands hold leading market share in both the gas and fluid
handling sectors, and both of these sectors are relatively fragmented in nature. CFX has the #1 market
share position in product categories such as heavy fans, rotary heat exchangers, industrial fans, screw
pumps, and lubrication services. About half of CFXs gas handling revenue (Howden) is generated in
emerging markets, serving end markets such as energy and industrial infrastructure. The fluid handling
business is more heavily weighted to developed markets such as the United States and Europe,
supporting customers in the energy, transportation, and industrial infrastructure end markets.
The Colfax Business System: A Culture of Continuous Improvement
A key driver of the successful record for the Rales Brothers first venture (Danaher) was its unique
performance culture and the corresponding benefits to its long-term financial performance (the Danaher
Business System described earlier in this report). A similar approach has been incorporated into Colfaxs culture
and business approach (known as the Colfax Business System or CBS). In our view, this consideration helps to
differentiate CFX from its competitors, and should be a catalyst for the creation of shareholder value during the
coming years, illustrated by organic growth, margin expansion, and efficient integration of M&A. Management
describes CBS in the 2014 10-K in the following way:
It is a repeatable, teachable process that we use to create superior value for our
customers, shareholders, and associates. Rooted in our core values, it is our culture. CBS
provides the tools and techniques to ensure that we are continuously improving our ability to
meet or exceed customer requirements on a consistent basis.
CBS Culture Taking Hold

Source: Company presentation, June 2015

Management summarizes the previously mentioned core value as consisting of 5 parts: 1) Customers
Talk, We Listen, 2) The Best Team Wins, 3) Continuous Improvement (Kaizen) is Our Way of Life, 4)Innovation
Defines Our Future, and 5) We Compete for Shareholders Based on Our Performance. CFX measures the
progress achieved by CBS from several perspectives. CBS-related metrics include on time delivery, sales
conversion, inventory levels, factory capacity and lead time, and reductions in waste and costs. As part of its
continuous improvement efforts, CFX has conducted over 400 Kaizen Events during 2015 alone. These events
are internal meetings designed to evaluate and enhance the Companys operational efficiency. Ultimately,
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Colfax Corporation
progress with these metrics should translate to enhanced growth and margins over the long-term (as illustrated
by Danahers success with a similar approach). As part of its cost reduction efforts, CFX has been implementing
restructuring initiatives during recent years that have included facility closures and decreases in headcount.
Management
The Rales brothers (currently aged in their early-mid 60s) are not involved in management of Colfaxs
daily operations (Mitchell Rales retains the Chairman position). However, the influence of the Rales brothers
and their approach at Danaher can still be seen in the firms distinctive culture and business model. During July
of 2015, CFX announced the hiring of a new CEO to replace the retiring Steve Simms. The new CEO, Matthew
Trerotola (age 48), was most recently an Executive Vice President at DuPont (responsible for overseeing the
Electronics & Communications and Safety & Protection segments). Prior to joining DuPont in 2013 Trerotola had
several managerial roles at Danaher. Not surprisingly, former Danaher employees have a meaningful presence
on CFXs management team and across the organization (CFO Scott Brannan is another former Danaher
employee). After Trerotolas appointment last year, Chairman Mitchell Rales issued the following statement:
He is an extremely talented executive with an ideal combination of strong leadership
skills, a track record of driving organic growth and significant expertise in global manufacturing
and engineering businesses. While at Danaher, where Steve and I got to know Matt well, he
developed a deep understanding and appreciation for the Danaher Business System and the
focus on continuous improvement, which will ensure a smooth transition into his new leadership
role at Colfax.
It is also worth noting that the Company also has CEOs for Colfaxs individual business lines within its 2
segments: Gas & Fluid Handling (Howden and Colfax Fluid Handling) and Fabrication Technology (ESAB). The
CEO for Fabrication Technology (Clay Kiefaber) announced his retirement from CFX last November. CFX CEO
Matthew Trerotola is serving as interim CEO of Fabrication Technology while the Company searches for a
permanent replacement. Given the unique culture at CFX, development and retention of talented managers has
been cited by CFX as a key future priority.
Executive Officers

Joined CFX

Prior Position/Background

Matthew Trerotola, President & CEO

Scott Brannan, SVP & CFO
Ian Brander, CEO: Howden
Daniel Pryor, EVP: Strategy & Development

2015
2010
1983
2011

Former executive at DuPont & Danaher

Previously at Aronson & Co, Danaher
Numerous operations positions at CFX
Managing Director: The Carlyle Group

Darryl Mayhorn, CEO: Colfax Fluid Handling

Steve Wittig, SVP: Business System & Supply Chain

2014
2011

President: Rexnord Aerospace Group

Operations positions at several firms

Recent Developments
Given the profile and sales mix at Colfax, it should come as no surprise that recent financial results have
been under pressure. The firm has been facing multiple market-related headwinds, reflecting the cyclicality and
economic sensitivity of its businesses and end markets. The deterioration in fundamentals has been particularly
pronounced for CFXs energy related businesses, reflecting the significant impact of lower energy prices on that
industrys capital expenditures. However, it warrants mention that management regards these current
challenges as cyclical in nature, and not representing impairments in the Companys long-term earnings power
(we concur with that assertion). Through the first 9 months of 2015, CFXs sales and operating profit have
declined 15% and 27% respectively. Comparisons have been negative for both of CFXs operating segments
during the same period, with both Gas & Fluids Handling and Fabrication Technology reporting double-digit drop
in revenue through the first 3 quarters of 2015. The Companys operating margin during the most recent quarter
stood at approximately 6%, down from 11% in the year-ago period. Management expects overall results to
remain under pressure during the coming quarters, with organic sales growth not expected to resume until 2017.
To make matter worse, CFXs significant exposure to overseas markets have caused an additional drag on
results via negative currency translation. Through the first 9 months currency translation penalized CFXs sales
by approximately $400 million (total sales for the period were $2.9 billion).
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Colfax Corporation
Management has undergone recent changes (new CEO appointed last July), and the firms leadership
has acknowledged that the extent of the declines for CFXs businesses have surpassed their earlier
expectations. Consequently, initial cost reduction efforts designed to mitigate challenging fundamentals may
have been insufficient, and management has begun to express greater urgency over this issue. In conjunction
with its release of 3Q-2015 results, CFX announced an additional $50 million in cost reduction measures
beyond what had been already targeted. In total, $45 million in cost savings are expected to be realized in 2015
and $50 million is projected for 2016 (largely driven by cuts in SG&A). Despite the negative comparisons, CFX
continues to be a profitable firm with significant cash flow. The firm continues to consider potential M&A
opportunities, and announced an authorization by its board for a $100 million share repurchase program. CFXs
guidance for 2015 results includes sales of $3.90-$3.95 billion, operating income of $345-$352 million, and
adjusted EPS of $1.52-$1.56.
Financial Performance
Sales
Gross Margin
Operating Margin

2013
7.5%
31.0%
10.5%

2014
9.9%
32.0%
10.1%

YTD 2015
-15.0%
31.6%
8.4%

Strategy & Growth Outlook

Strategy
CFXs financial results help to demonstrate the challenges that are inherent to cyclical businesses. In
this most recent period, the extent and magnitude of the Companys industry headwinds have exceeded
managements initial expectations, and investors have largely abandoned the stock as near-term fundamentals
offer little in the way of positive changes (stock down over 50% in the past year). In our view, maintaining a
coherent and consistent strategy through all phases of market cycles is a key driver of long-term success. CFX
has maintained this consistent long-term approach, while also acknowledging the need to make adjustments
(cost reduction) to reflect the current environment. Management provided a detailed update of its strategy and
outlook during an investor day in mid-December. A recurring theme throughout the presentation was the view
that current conditions represent a cyclical correction rather than a permanent impairment in CFXs portfolio of
businesses. We concur with this assessment, and would encourage investors to avoid placing undue emphasis
on existing challenges when evaluating CFX shares from a long-term perspective.
Management has summarized its overall Company strategy into 3 corporate priorities. Its first priority is
described as Secure a Strong Foundation. This reiterates the firms commitment to maintaining leading market
share positions in its respective businesses, achieving top tier technological innovation that differentiate its
products and services, and use of CBS to continuously improve Company performance. Its second priority is
described as Improve and Grow Our Business. This priority primarily addresses the role CBS plays in CFXs
financial results, illustrated by metrics such as margin improvement and free cash flow conversion. Moreover,
management is targeting growth rates for its businesses that exceed industry rates. CFXs third priority is to
Innovate and Acquire to Accelerate. This priority relates to the prominent role of M&A as the Company seeks
to build and expand its business platforms and achieve synergies and scale within the highly fragmented
industries in which it operates. Importantly, innovation should also benefit from a steady increase in CFXs
annual R&D expenditures through all market phases. Overall, these priorities are designed to support CFXs 3-5
year financial goals which include annual organic sales growth that exceed global GDP by 1%-2% and overall
operating margins in the mid-teens.
CFXs 2 segments (Fabrication Technology and Gas and Fluid Handling) each have their own unique
opportunities and challenges that require a customized strategy and business approach. Fabrication Technology
is currently under the interim leadership of CFX CEO Matthew Trerotola, but this has not hindered the firm from
developing and updating its strategy for this business. A combination of end market weakness and unfavorable
foreign exchange translation has placed downward pressure on profits for CFXs welding intensive businesses.
Consequently, initiatives related to productivity and cost reduction have taken on added significance. These
efforts have translated to an 8% reduction in SG&A and a 10% reduction in headcount. The ESAB business has
been undergoing a restructuring to improve performance and adapt to weak market conditions. Service levels to
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Colfax Corporation
customers have been a primary focus as ESAB, addressed via simplifying the supply chain. An additional
ongoing challenge has been the integration of the Victor Technologies acquisition (completed in 2014 for
$948 million), a welding provider with a complementary product and geographic profile that boosted CFXs
exposure to higher margin products. Innovation for this business remains a key strategic priority, illustrated by
growing demand for automated and user-friendly welding equipment (a function of the industry shortage of
skilled welders). Similar to the expectations for the overall firm, financial progress is expected to be muted in
2016, but CFX is targeting 2%-4% organic sales CAGR and a mid-teens operating margin for Fabrication
Technology over the next 3-5 years.
The Gas and Fluid Handling business has faced its own share of challenges during recent years,
particularly relating to weakness in the energy industry. Restructuring and cost reduction measures designed to
mitigate industry headwinds have been among the firms top strategic priorities. At Howden (gas handling), a
10% reduction in production capacity paired with a management reorganization are projected to yield $50 million
in cost savings by the end of 2016. At Colfax Fluid Handling (fluid handling) similar restructuring actions have
been implemented, translating to an 8% reduction in SG&A. From a longer-term perspective, the Gas and Fluid
business is focused on enhancing its organic growth prospects by expanding the addressable markets for its
products and capturing a greater portion of clients aftermarket and services business. Moreover, broad market
trends such as energy efficiency investment and emerging market infrastructure needs should be positive
catalysts for long-term demand. Given the highly fragmented nature of the gas and fluid handing industry,
organic growth at CFX will likely continue to be supplemented by M&A activity. In addition, M&A synergies
combined with ongoing benefits from CBS should be meaningful sources of efficiency and margin expansion
during the coming years. From a 3-5 year perspective, CFX is targeting 3%-5% organic sales growth and a midteens operating margin for Gas and Fluid Handling.
Growth Outlook
As suggested by the firms recent commentary and guidance, near-term growth comparisons (2016) for
CFX are likely to remain relatively weak. This outlook reflects the challenging conditions within several of CFXs
end markets such as energy and infrastructure. The Companys high exposure to foreign currency and
emerging market economies are additional challenges that will hinder CFXs financial results during the coming
quarters. As management has indicated, organic growth trends are not expected to regain traction until 2017,
and reaching more normalized levels of sales and profits is likely to be more of a multi-year process. CFX
strategies and objectives are expressed in a 3-5 year context, and the exact timing of realizing these objectives
will be dependent on the pace of recovery within the Companys respective end markets. It warrants mention
that we utilize a normalized approach for evaluating companies with exposure to the oil and gas sector. In our
view, a mid-cycle pricing scenario for oil and gas ($80 oil, $4 natural gas) provides a more relevant view longterm fundamentals and earnings power for such firms. Attempting to forecast the timing or magnitude of a
commodity price recovery is an inexact science at best. However, even a more modest recovery and
stabilization for commodity prices could provide a meaningful tailwind to CFXs growth comparisons going
forward. In the case of CFX, some normalization of foreign exchange rates back to more typical levels could
also provide a material benefit to financial results (though we regard this as unrelated to the firms underlying
operational performance).
Looking at CFX from a 2-3 year perspective (roughly 2018), we believe sales and EBITDA of $4.5 billion
and $600 million respectively could be attainable (EPS over $2.00). This assumes some recovery in end market
fundamentals, and incorporates the benefits of the firms ongoing efficiency and cost reduction initiatives. This
2018 projection assumes an overall operating margin of 10% for the Company, still below CFXs 3-5 year
objective and below margin levels achieved in recent years. Looking beyond 2018, EBITDA could exceed
$700 million assuming CFXs end markets ultimately achieve a full recovery. This level of EBITDA would
represent an increase of more than 40% relative to 2015 guidance (implies EPS of~$3.00). In our view, CFX has
multiple catalysts for long-term growth that are currently being overlooked by investors. In addition to the
previously discussed expectation for a more normalized pricing market for energy, several other potential drivers
warrant mention. In particular we would highlight CFXs significant exposure to emerging economies (over 40%
of sales). Overall, this exposure to emerging economies should be a positive catalyst for long-term growth,
helping to distinguish CFX from its industry competitors. Near-term growth may be more muted in these
geographies, but overall GDP growth is still expected to approach 5% within the next 2-3 years according to IMF
projections. The urbanization and growth of the middle class in regions such as Asia should drive continued
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Colfax Corporation
growth in CFX end markets such as power generation and infrastructure. According to the International Energy
Agency, worldwide demand for electricity is projected to increase by over 60% within the next 20 years (coalfired plants in Asia will be a primary source of new supply). In addition, CFXs marine end market (11% of sales)
should be a beneficiary of the continued trend towards global trade (supporting construction and maintenance of
shipping capacity). Based on projections from shipping concern Hapag-Lloyd, long-term growth prospects for
the marine industry continue to be at least 3%-5% per year.
Balance Sheet and Financial Position
CFX has a strong balance sheet and ample cash flow. In our view, this is particularly crucial given the
current industry headwinds, and the Companys use of M&A as part of its business model. As of the most recent
quarter, CFX has net debt of approximately $1.3 billion, a relatively modest degree of financial leverage given
the firms level of profitability (EBITDA on a TTM basis stands at over $500 million). CFX has investment grade
credit ratings and its debt bears interest rates in the low single-digits (variable rates subject to changes in
LIBOR). Given the possibility of distressed assets becoming available for its respective businesses, this financial
strength could take on added significance during the coming years. The firm also has pension obligations that
were underfunded by approximately $296 million as of the most recent fiscal year (a majority of the obligations
are in overseas markets). It warrants mention that CFX has been contributing Company shares to the plan on a
regular basis.
CFX does not pay a dividend, and typically focuses its capital allocation on M&A activity. However,
given the firms increasingly depressed stock price, CFXs board recently authorized a $100 million share
repurchase program (no guidance provided on time frame for potential repurchases). CFXs overall capital
allocation approach is focused on achieving attractive returns that maximize shareholder value over the long
term. Historically, M&A has been focused on bolt-on deals that expand or complement existing businesses (the
transformative acquisition of Charter 2012 is the main exception). Since the Charter acquisition, 14 more
modestly sized acquisitions have been completed. Importantly, management cites price discipline as a key
aspect of its M&A approach, and targets a return on capital of at least 10% within 3 years of deal completion.
Consistent with the CBS approach, integration and synergies for transactions are closely monitored and
regularly reviewed. Innovation for the purposes of efficiency and organic growth is another focus of CFXs
capital allocation, and capital expenditures ($81 million last year) has remained steady though all phases of the
economic cycle. In our view, the track record of capital allocation, M&A, and value creation at Danaher should
provide added confidence for investors when evaluating the outlook for Colfaxs capital allocation.
Revenues Added Through Acquisition
(Year Prior to Acquisition; Cumulative $ Million)
$1,200

Revenue $MM

$1,000
$800
$600
$400
$200
$0
2012

2013

2014

2015

Note: Revenues added from deals closed after Charter. Not constant currency.
Source: Company presentation, December 2015. Internal company reporting
and company filings.

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Colfax Corporation
Clearly, CFXs most recent financial results are not representative of the firms capacity for profits and
cash flow given the cyclical downturn many of its businesses are experiencing. Prior to 2015, annual free cash
flow was approximately $300 million (implying a free cash flow yield of 11%). Annual capital expenditures have
been in the $70-80 million range during recent years, and annual R&D expense has been in the $20-$40 million
range. CFXs high exposure to overseas markets makes the Companys results sensitive to foreign exchange
rates, and adds to the volatility of near-term results. Just through the first 9 months of 2015, negative effects
from foreign currency translation have reduced sales by about $400 million on a year over year basis.
Conversely, the strong U.S. dollar may prove to be an asset in CFXs future M&A activities, making foreign
assets more affordable for a U.S. based buyer.
Corporate Governance
Insider ownership at Colfax stands at approximately 20%, largely a function of the 19% stake retained
by founders Mitchell and Steven Rales. Also worth noting, board member Patrick Allender purchased an
additional 10,000 shares of CFX in December at a price of $22.13 (doubling his stake). Importantly, there are
not multiple classes of CFX shares, ensuring full alignment of interests between investors and insiders. This
consideration, paired with the founders substantial stakes, help to illustrate a strong shareholder orientation at
Colfax. Moreover, compensation for senior executives have a significant variable component (cash and equity)
benchmarked to financial metrics such as sales, operating profit, EPS and return on capital. CFX does utilize
stock options as part of its compensation system, and annual stock-based compensation has averaged about
$13 million over the past 3 years. Unrecognized compensation related to stock options stands at approximately
$35 million. Under CFXs corporate governance guidelines, it is required that a majority of its Board qualify as
independent according to NYSE standards. However, the board of directors has several members with
experience at both Colfax and Danaher. BDTs previously discussed ownership stake allows that firm to have a
seat on the Colfax board. Board members are subject to annual elections.
Board of Directors
Board Member
Mitchell Rales
Matthew Trerotola
Steven Simms
Patrick Allender
Thomas Gayner
Rhonda Jordan
San Orr III
Clayton Perfall
Rajiv Vinnakota

Independent Background
Chairman of CFX, Cofounder of Colfax and Danaher
President & CEO of Colfax
Former President & CEO of Colfax (retired in 2015)

Former CFO of Danaher

Chief Investment Officer at Markel Corporation

Former Executive at Kraft Foods

Partner & COO at BDT Capital Partners

Former CEO of Archway Marketing Services

President of SEED Foundation (education non-profit)

Valuation & Conclusion

CFX shares have clearly been out of favor with investors over the past 1-2 years. The stock has
declined by more than 50% over the past year, and shares have declined by roughly 70% from 2014 highs. In
our view, this poor performance largely relates to the challenges associated with CFXs end markets (such as
energy) and exposure to emerging market economies. The current industry environment continues to be
challenging, and financial results during the coming quarters will likely be far from stellar. However, CFXs
strong financial position should allow it to weather the difficult operating environment, and potentially acquire
attractively priced assets that bolster or complement its existing portfolio of businesses. Longer-term, we believe
the firms fundamental outlook, competitive position, and profit potential have not been impaired by the recent
headwinds. As discussed earlier in this report, the firm still possesses an attractive long-term growth profile that
investors are largely choosing to ignore. Moreover, its unique performance oriented culture (stemming from the
founders past history at Danaher) and commitment to shareholder-oriented capital allocation provide additional
catalysts for growth and margin expansion during the coming years. Given the firms culture, heritage, and high
degree of insider ownership, a strong shareholder orientation should remain a key driver of CFX long-term
business approach.
-9-

Colfax Corporation
Peer Comparison Table
Company

Ticker

TTM EV/EBITDA

TTM Operating Margin

TTM ROE

Danaher

DHR

15.8x

16.9%

11.0%

Dover

DOV

9.2x

13.2%

16.2%

Flowserve

FLS

7.9x

14.9%

8.7%

Illinois Tool Works

ITW

11.1x

21.1%

29.6%

LECO

7.9x
10.4x

16.0%
16.4%

12.9%
15.7%

CFX

7.7x

9.7%

6.6%

Lincoln Electric
Peer Average
Colfax

As the above table depicts, CFXs level of profitability trails its peers on a TTM basis. CFXs high
exposure to energy and emerging markets has likely hindered its relative operational performance. As
fundamentals in these areas eventually recover, and CFX executes on its growth and margin objectives, we
would expect this differential to gradually narrow over time. It also warrants mention that recent stock
performance for CFXs peer group has also been weak, as the 5 firms listed above have declined an average of
18% over the past 12 months. Looking at the current valuation based on our projections for 2018, CFX shares
are trading at an EV/EBITDA multiple of approximately 7.25x, and a P/E multiple of 12.0x. Since CFXs
transformative acquisition of Charter International in 2012, CFX have generally traded at a multiple in the
8.0x-14.0x range from an EV/EBITDA perspective, and its long-term average multiple since becoming a publicly
traded firm has approximated 11.0x. As CFXs long-term earnings power becomes more apparent, multiple
expansion to more typical historical levels should become attainable. Colfaxs already depressed valuation, and
its level of free cash flow generation (11% free cash flow yield) help to demonstrate the increasingly attractive
long-term risk/reward proposition the stock is offering investors.
Although CFX largely focuses its cash flow on internal investments and M&A and it typically does not
return capital to shareholders, the boards recent $100 million share repurchase authorization further illustrates
the historically attractive valuation of the stock. However, since the firm has provided no guidance on share
repurchase activity, our estimate of intrinsic value assumes no change in share count going forward. Moreover,
no growth or margin benefits from future M&A activity have been incorporated into our future projections.
Consistent with managements outlook, our projections assume no organic sales growth until 2017 (we project
mid single-digit revenue growth for the 2017- 2018 period). These assumptions may prove to be conservative
from a long-term perspective, especially if one assumes a full recovery in CFXs end markets is eventually
achievable.
CFX Estimate of Intrinsic Value
2018
Value ($MM)
EV/EBITDA
10.0x
6,065
Net Debt
(1,328)
Underfunded Pension
(296)
Equity
4,441
Shares Outstanding

125.0

Intrinsic Value Per Share

$35.53

Implied Total Return Potential

61%

Our estimate of intrinsic value for CFX of $36 per share is based on a 2-3 year time frame, and
assumes only a partial recovery in its end markets (and utilizes an operating margin of 10%, still below the firms
mid-teens objective). This estimate implies an EV/EBITDA multiple of 10.0x, and potential upside of more than
60% over the next 2-3 years. By 2018 EPS of over $2.00 should also be achievable, implying a P/E of about
- 10 -

Colfax Corporation
17.0x based on our estimate of intrinsic value. Evaluating the stock from a longer term perspective, this estimate
of intrinsic may prove to be low. Looking beyond 2018, EBITDA could eventually exceed $700 million assuming
CFXs end markets ultimately achieve a full recovery (and a mid-teens operating margin would likely become
attainable). Assuming this higher level of EBITDA and incorporating that into our valuation projection for CFX
(10.0 EV/EBITDA) would suggest an intrinsic value of approximately $45 (over 100% upside) from a normalized,
long-term perspective. It warrants highlighting that CFX shares were trading above $70 per share as recently as
mid-2014. Overall we view CFXs current valuation as an attractive entry point for patient, long-term investors.

Risks
The Companys primary risks include:

Many of Colfaxs businesses are sensitive to economic conditions, and profits could decline in the
event of economic weakness.

Continued energy price weakness and the corresponding declines in capital expenditures could
translate to additional headwinds for several of Colfaxs businesses.

The majority of Company sales are derived from overseas markets, causing firm results to have
significant sensitivity to foreign currency translation and other global trade issues.

Colfax places a strong emphasis on M&A as part of its operating strategy, and unattractive
transactions could negatively impact shareholder value.

The Company is involved in several asbestos-related lawsuits that could create financial liabilities in
the future. The firm has insurance coverage to address this issue, but this issue still creates
potential uncertainty.

Some Colfax employees are represented by unions, creating the potential for work disruptions.

The firms expectation for a resumption of organic sales growth may take longer than expected to
materialize.

Analyst Certification
Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal
views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our
analysts compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this
report.

- 11 -

Colfax Corporation
COLFAX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

ASSETS

September 25, 2015 December 31, 2014

Current Assets:
Cash and cash equivalents
Trade receivables, less allowance for doubtful accounts
Inventories, net
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets
TOTAL ASSETS

221,247
990,452
449,891
337,502
1,999,092

305,448
1,029,150
442,732
323,148
2,100,478

664,200
2,876,011
1,004,232
496,361

727,435
2,873,023
1,043,583
491,842

$ 7,039,896

$ 7,236,361

LIABILITIES AND EQUITY

Current Liabilities:
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities

16,517
735,310
453,599
1,205,426

9,855
780,287
496,207
1,286,349

Long-term debt, less current portion

Other liabilities
TOTAL LIABILITIES

1,532,267
998,172
3,735,865

1,526,955
1,070,613
3,883,917

Equity:
Common stock, $0.001 par value
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Colfax Corporation equity
Noncontrolling interest
TOTAL EQUITY

124
3,219,262
513,103
(629,435)
3,103,054
200,977
3,304,031

124
3,200,832
389,561
(443,691)
3,146,826
205,618
3,352,444

TOTAL LIABILITIES AND EQUITY

$ 7,039,896

- 12 -

$ 7,236,361

Disclaimers
Asset Analysis Focus is not an investment advisory bulletin, recommending the purchase or sale of any security. Rather it
should be used as a guide in aiding the investment community to better understand the intrinsic worth of a corporation. The
service is not intended to replace fundamental research, but should be used in conjunction with it. Additional information is
available on request. The statistical and other information contained in this document has been obtained from official reports,
current manuals and other sources which we believe reliable. While we cannot guarantee its entire accuracy or
completeness, we believe it may be accepted as substantially correct. Boyar's Intrinsic Value Research LLC, its officers,
directors and employees may at times have a position in any security mentioned herein. Boyar's Intrinsic Value Research
LLC Copyright 2016.

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